Tuesday, December 12, 2006

Calls of Note Part 2

- JP Morgan notes that despite the positive environment for DRAM memory (roughly 69% of MU F4Q06 revenue) they are concerned with Micron's (NYSE:MU) growing inventory levels and prospects for a weaker than expected flash environment in 1HC07. As a result, they see limited catalysts for outperformance of MU stock, and are downgrading MU from Overweight to Neutral.

Firm believes Micron's inventory levels grew again in its November quarter (F1Q07, not reported yet) due to higher than expected production of NAND flash memory chips (9% of F4Q06 sales) and weaker flash shipments. They believe MU realized lower than expected flash sales due to lower pricing and weak demand from the retail channel.

Pricing for NAND has been below firm's expectations during 2HC06 due to excess capacity. Due to additional capacity growth and a seasonal slowdown in demand, they expect NAND pricing tocollapse in 1HC07. Firm views Micron's higher production and growing inventory as a liability, given the expected NAND weakness.

JPM is still positive on DRAM environment which could limit downside for MU, but they prefer QI to take advantage of DRAM. Firm's checks indicate DRAM pricing should remain stable well into C1Q07, which should drive upside to Qimonda estimates as over 90% of its sales are from DRAM and the company has not reached peak gross margins of roughly 35%.

MU is trading at 1.5X C06E EV/sales the low end of a normal range of 1.3X-3.0X.

Notablecalls: Looks like I didn't pay enough attention to the flash side of business. The co had been adding production capacity there and now it looks like it's coming back to bite'em in the arse. I no longer expect MU stock to move up in the n-t.